This FTSE 100 laggard isn’t the only cheap dividend stock I’ve just bought

This Fool has been shopping and thinks he’s bagged a couple of bargains.

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Having waited for markets to settle, I’ve finally started building a position in a company I believe investors continue to be too bearish on, namely broadcaster and FTSE 100 member ITV (LSE: ITV). Here, in a nutshell, are the reasons behind my purchase. 

Going cheap

Let’s begin at the valuation. Trading at a little over 9 times expected earnings, the £5.4bn-cap is surely rapidly approaching (if not already in) bargain territory, particularly for a company that generates consistently high margins and returns on the capital it invests.

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Much of the reason behind the near-halving of the share price over the last couple of years can be attributed to concerns surrounding the fall in advertising revenue and a healthy dose of Brexit-related jitters. While this is understandable, I think too little attention has been given to the growth in online revenue and through its Studio segment. 

In addition to looking cheap, ITV’s shares also come with a 6.1% yield in 2019 based on the current share price. Covered 1.75 times by predicted profits, this payout may not be the biggest in the FTSE 100 but it looks far more secure than those offered by some other companies. 

Also, I rate ITV’s management team, particularly ex-easyJet boss Carolyn McCall. While a completely different business, it’s worth remembering that the budget airline’s share price quadrupled during her stint as CEO.

Whether Dame McCall gets sufficient time to fully realise her ‘More than TV’ vision for ITV is debatable, it  brings me to my final (although admittedly more speculative) reason for buying.

Simply put, I continue to believe ITV will become an acquisition target in the near future.  Although not having quite the same reach as a business like Sky, a scramble for its aforementioned Studio arm and content could result in another bidding war for one of the UK’s biggest companies. 

ITV’s announces its results for the previous financial year on 27 February. Regardless of whether the market reacts favourably or not, I can see myself adding to my holding in the coming months.

Good odds

With a market-cap of just £650m, online gambling operator 888 Holdings (LSE: 888) is a world away from the market’s top tier. Nevertheless, it boasts some of the qualities that first attracted me to ITV.

Again, the shares look cheap. Having almost halved in value in just nine months on concerns over regulation and declining revenue in the UK, 888 now trades on 12 times expected earnings for the current financial year. Considering its growing momentum in Europe and the huge opportunity that could develop across the pond if more US states legalise online gambling, this seems too low to me. So much so, I’ve taken a stake in the business. 

Like ITV, I’d be surprised if the company wasn’t already on the radars of several potential suitors. It has no debt, stacks of cash, decent margins, high (if volatile) returns on capital, and no creaking high street estate to think about compared to others in the industry. 

Full-year results are due on 12 March. I’m pretty sure new CEO Itai Panzer will want to his tenure to begin positively but, even if 888 continues to fall, I’ll be tempted to buy more. The stock is forecast to yield 6.7% this year — sufficient compensation while I wait for the price to recover.

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Paul Summers owns shares in ITV and 888 Holdings. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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